• Whose Interests Are Served by Unemployment?

    The unemployment figure announced this week at 6% and rising is a disgrace – not only a personal tragedy for individuals and families but a senseless waste of the nation’s resources that makes us all poorer. Nothing contributes more directly to growing poverty and widening inequality.  What’s more, the official statistics undoubtedly understate the number of those seeking work, or who would do so if there were jobs available, so the lost output and the numbers of blighted lives are even greater than they seem.

    Unemployment at this level is not just a fact of life or an act of God – it’s a policy choice and is the best indicator we have that the government has other priorities and that the economy is failing.  There is nothing economically efficient about denying a significant sector of our population the opportunity to make their contribution.

    The unemployment total tells us that we have failed to address our many problems. It tells us that the focus on eliminating “the deficit” at the expense of other more important goals has been sadly misplaced and that sustained government spending cuts have meant not only poorer services but also a lower level of economic activity – certainly lower than the level needed to provide full employment.

    The government, after all, is a customer like any other; if it cuts and lays off staff, there is a smaller market for the goods and services provided by the private sector, and therefore less incentive to employ more staff across the whole economy.

    The unemployment total also tells us that nothing has been done to remedy the deficit that really matters – the country’s deficit, or, in other words, our failure to pay our way in the world. It is that deficit that requires us to sell assets and to go on borrowing from overseas in order to make up the difference, and it is that deficit too that represents our continued appetite for imports that we can’t afford or that we could be producing ourselves.

    A sluggish economy and high unemployment tell us that we have wasted the opportunity provided by record commodity, and particularly dairy, prices, to broaden our productive base. Our dangerous dependence on the dairy industry has left us with few options when prices fall. The rest of the economy struggles to pick up the slack under the burden of interest rates that are still higher than elsewhere and of a dollar that is still overvalued and that prices Kiwis out of jobs.

    The one area of the economy that is, in some senses at least, booming, is the Auckland housing market. But that is little comfort to the unemployed who do not on the whole own their own homes. While record mortgage lending may have produced record bank profits, at over $4 billion, and Auckland home-owners can take comfort from an average $1600 weekly increase in house values, the unemployed have trouble making ends meet – and gains made in housing values and asset values more generally provide few jobs.

    While continuing high unemployment may be the mark of a malfunctioning economy, are we justified in holding the government to account, or is it the result of factors beyond their control? Keynes, the greatest economist of the twentieth century, provided a direct answer.

    His response to the Great Depression of the 1930s was to demonstrate that unemployment was the result of an inadequate level of effective demand in the economy – and that government policy was the main determinant of effective demand. A government that focused on a goal other than its own deficit, in other words, could act effectively to reduce unemployment. That lesson was learned last century – but seems to have been forgotten in the aftermath of the Global Financial Crisis and the consequent recession.

    So, why does the government not act? The answer is that it feels no need to, since most people – though not of course the unemployed – seem unconcerned, and in truth the government is not unhappy about the current numbers of jobless.

    The reason for this is not hard to find. The news bulletins, in reporting the rise in unemployment, also remarked on the fact that wage levels were barely moving. That stagnation in wage rates is an important factor in the current unduly low level of inflation that means that the Reserve Bank is in danger of missing its inflation target.

    But the flatness in wage levels is of course causally linked to the high unemployment rate. A labour market where there are multiple applicants for every job that becomes available is also one where employers have the whip hand and where the bargaining power of workers is much reduced.

    An economy with a permanent pool of unemployed and with no real growth in wage rates is also an economy with less purchasing power and demand than it ideally needs. We are all worse off as a consequence. Most of us can soldier on without too much inconvenience. It is the unemployed who are the sacrificial lambs on the altar of neo-classical orthodoxy.

    Bryan Gould

    5 November 2015

  • Aiming at the Wrong Target

    Labour will be “tougher than the Tories” when it comes to forcing long-term beneficiaries back into the labour market; so Labour’s new shadow Work and Pensions Secretary, Rachel Reeves, was reported as saying last week. The comment, which was presumably made deliberately to secure the headline, seems to be a mistake on a number of levels.

    The report suggested that the comment was a response to polling that showed that voters were twice as confident of the Tories’ effectiveness in dealing with the issue as they were of Labour, and was presumably an attempt to nullify the supposed advantage that the Tories enjoyed.

    But my own political experience, and particularly experience of campaigning, suggests that the initiative was based on a false premise. Most voters, unlike those who are politically active and committed, do not have coherent political positions that are consistent across all issues. They are perfectly capable of adopting attitudes that contradict each other from one issue to the next.

    What determines the way they vote is not necessarily what they think on a given issue but which issues are uppermost in their minds on polling day. History shows that, with their allies in the right-wing media, the Tories are expert at tweaking the issues that give them an advantage at the crucial time.

    So, immigration, supposed benefit “scroungers”, trade unions bent on strike action, all attract headlines as part of a deliberate attempt to raise the salience of issues that suggest that our deep-seated problems are caused by failing to rein in the nefarious activities of ordinary people and are in no way the responsibility of the powerful people who run our economy and take most of its benefits.

    It is an important part of this well-proven strategy that Labour should be lured into contesting such issues so that public attention is focused on them. I recall that, in the run-up to the 1992 general election, the Tory press provided the “oxygen of publicity” to fears that a new Labour government would raise income taxes.

    The Labour response was to launch, at the beginning of the election campaign, a plan to raise National Insurance contributions. The idea was to use John Smith’s Scottish prudence to show that this was a sensible initiative that should not be regarded as an increase in taxes.

    Not surprisingly, this proved difficult to sell to the electorate. Labour’s tax plans became the dominant and continuing theme of the election campaign, with the result that John Major’s government was re-elected.

    The lesson to be drawn is that election campaigning is largely about controlling the agenda. A successful opposition campaign should be about exposing the government’s failures and focusing on those elements in its own policy that are likely to strike a chord with most voters.

    Time spent on trying to negate vulnerability on issues peddled by the Tories, in other words, is likely to be wasted at best and counter-productive at worst. And that is never more true than on the issue on which Rachel Reeves thought it wise to make her own demarche.

    Her comment spells bad news for Labour. It focuses attention on an issue which can only benefit the Tories. No one will believe that on this issue the Labour opposition will be as ruthless as the Tories (and heaven help us if they did!) The most the voters should hear from Labour on the issue of benefit fraud is that, as in every part of public spending, dishonesty will be punished and value for money will be insisted upon.

    But what it does do is to validate the Tory insistence that benefit fraud and supposed “scrounging” is an issue that deserves to be at the top of the government agenda. The more Labour proclaims its “toughness’, the more voters will believe that this is an issue that deservedly requires priority government attention – and the more likely they are to think that Labour is simply posturing and that only the Tories are to be trusted to take real action.

    Worse, it diverts attention from what Labour should really be saying about the fact that so many people are victims of unemployment and are therefore forced to depend on a generally miserable level of benefits in order to keep house and home together.

    The most effective means of reducing the number of beneficiaries would be, in other words, not punishing the unemployed further, but restoring something approaching full employment; and the most important obstacle to that is a damagingly under-performing economy, the direct consequence of failed government economic policies and of their insistence on austerity as a response to recession (now disowned by the IMF, no less) in particular.

    Nor is it the case that this is an accidental by-product of Tory policy. It is an essential part of the Tory strategy that the burden of getting our economy moving again is to be borne by working people. According to this doctrine, it is their responsibility to price themselves back into work by accepting lower wages, and accepting fewer rights and protections at work – “zero hours” contracts are a good example.

    The pressure on beneficiaries is all of a piece with this approach to our economic problems. In the absence of new jobs, forcing the unemployed back into the labour market can only mean that those with jobs will be compelled to withstand that competition by accepting lower wages if they wish to stay in work. The result? Downward pressure on wages as a whole.

    Is this the strategy that Rachel Reeves intends to endorse? Wouldn’t she do better to focus on unemployment and its causes, and persuading her colleagues to develop a strategy for dealing with it?

    Bryan Gould

    14 October 2013

  • Unemployment Makes Us All Poor

    Last Thursday’s jobless figures – the worst in thirteen years – show that the four years since the global financial crisis plunged the world into recession have seen New Zealand unemployment get worse, not better.

    And, as is always the case in a recession, the official figures inevitably understate the numbers of those seeking work. In a more buoyant economy, improved employment prospects would bring many of those currently resigned to being out of work back into the jobs market.

    In the wake of the grim news about factory closures and lay-offs over recent months, the figures were only to be expected. Indeed, the warnings about a crisis in manufacturing have been coming thick and fast, and from all quarters.

    There was, though, one person, it seems, who was blindsided by the bad news. The Prime Minister, we were told by the television news, was “taken by surprise”. The only explanation for this is that John Key has paid little attention to the unemployment issue over the past four years, despite its destructive impact both on individuals and their families, and on society as a whole.

    Over that whole period, I and others have warned consistently that the policies currently being followed would inevitably see unemployment rise. This was entirely consistent with the low priority given by the government to the problem – apart from an ineffectual “Jobs Summit” in the government’s opening months, unemployment has been left to look after itself.

    But that neglect has been anything other than benign. The government has deliberately put in place policies to restrict benefits and cut their value, and to slash wages at the bottom end of the scale, so as to force those without work back into a non-existent jobs market.

    The object has been to make people compete for the few low-paid jobs available by offering to work for lower and lower wages, so that there is downward pressure on the whole wages structure. There, in a nutshell, is the government’s strategy for dealing with unemployment – don’t bother about creating more jobs by getting the economy moving again, but force down wages in the hope that people will price themselves back into work.

    Even if this strategy were to work in its own limited terms, lower wages would mean less purchasing power and lower demand. How would this help to get the economy moving?

    The government has reinforced its strategy by cutting public spending and throwing public servants out of work, so that they add to the competition for the dwindling number of jobs. This leaves the obvious question – where is the increased demand needed to create more jobs to come from if the government, instead of stimulating economic activity, makes its own contribution to closing the economy down?

    Are they unaware that the IMF, taking fright at last at what austerity is doing in Europe, has published a new assessment of the powerful multiplier effect of cuts in government spending on the level of economic activity? Even the government’s supposed central goal – eliminating its deficit by 2014/15 – is made much more difficult if high unemployment and a flat economy generate an equally flat tax revenue.

    What is really depressing, however, about our current plight is that even if by some miracle the economy were to get moving again, we would have done nothing to re-balance the economy towards saving, investment and exports and away from consumption and imports.

    We are about to start another familiar and vicious circle – an overheated Auckland domestic property market, fuelled by unrestrained lending by banks whose sole concern is easy profits, leading to higher interest rates, producing an overvalued exchange rate that prices our production out of international markets and cuts our margins, so that we are forced to borrow more from overseas and sell our remaining assets to foreign owners. Little wonder that those fortunate enough to have money to spare see domestic housing as the only sensible investment and making and selling things into international markets as a game for mugs.

    The chances of breaking out of this destructive cycle seem slimmer than ever. The new Governor of the Reserve Bank has wasted no time in abjuring the hints of greater flexibility issued by his predecessor and instead nailing his colours to the mast of an orthodoxy that has now been doing its destructive worst for three decades. We see not a scintilla of new thinking from either the government or the Reserve Bank; surprisingly the only hint of the need for a new approach now comes from the Treasury.

    Planet Key is apparently a sunlit place of leisure and fun. The real world, at least the part of it for which John Key has some responsibility, is a much harsher place. The plight of the unemployed makes us all poorer. Without changes in policy, we face the grim prospect of national decline, despite the advantages we enjoy of political stability, an educated workforce, a supportive context in which to do business, and access to growing markets for the premium products we are uniquely expert at producing. Sadly, that is all outweighed by the mistakes that our leaders are determined to go on making.

    Bryan Gould

    12 November 2012

    This article was published in the NZ Herald on 14 November.

  • Crisis? What Crisis?

    In January 1979, the British Prime Minister, Jim Callaghan, returned from a Summit meeting in the Caribbean to a Britain suffering the serious industrial unrest that became known as the “winter of discontent”. Interviewed at Heathrow airport, Callaghan’s relaxed attitude to talk of chaos was translated by The Sun the following morning into a headline reporting the Prime Minister as saying “Crisis? What Crisis?” The electorate’s reaction led directly to Mrs Thatcher’s election victory later that year.

    John Key, returning from Hollywood this week, was equally dismissive of talk of a crisis in manufacturing. Our Prime Minister was in some ways even more insouciant than Callaghan; faced with Statistics New Zealand figures showing 40,000 manufacturing jobs lost in the last four years, he airily asserted that our expert official statisticians had simply got it wrong.

    But the Prime Minister’s denial of the facts reveals more than just a surprising and mistaken reliance on his own expertise in handling statistics and a confidence that he will be believed, however improbable his assertions. It reflects a deliberately relaxed attitude by the government to the whole issue of unemployment.

    The Prime Minister resists talk of crisis because he believes that people are out of work because that is what free-market theory dictates. That theory takes a very simple view. If the supply of a particular commodity exceeds the demand, the price of that commodity will fall – which is certainly true for most commodities, such as, say, sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.

    Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.

    The first objection to this view is that the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.

    The demand for labour could easily be raised, but that would require a change in policy – and that won’t happen for as long as the government insists that wages must come down, since lower wages and lost jobs mean lower spending, and therefore no stimulus to demand in general and demand for labour in particular.

    True to the theory, the government continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. After four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred.

    Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.

    It may be hard to credit that our government wants to bring wages down, yet that is what they have set out to do. How else to explain why workers’ rights at work have been significantly weakened, so that workers can be taken on, and then thrown back on the scrap heap without any redress? Why else are young workers to be paid less than the minimum wage, if not to remove the floor placed under wage levels? Why was a modest rise in the minimum wage voted down while top salaries zoom upwards?

    Why have benefits been removed and reduced so that even solo mums with young children are forced back into the labour market, whether or not there are jobs? Why is covert support lent to big employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees?

    These measures are explicable only if the intention is to force the lowest wages lower, so that downward pressure will increase on wages across the board. We can now see that “closing the gap with Australia” was only ever so much pie in the sky; far from encouraging New Zealand wages to match Australian levels, the government is intent on using high unemployment to force them lower.

    While Bill English occasionally lets the mask slip by touting lower New Zealand wages as a competitive advantage, the government is unwilling even to engage in debate about improving our competitiveness through changes in exchange rate policy. A lower exchange rate would at least give us a fair way of reducing our costs across the board, and provide a platform from which we could begin to grow the economy again. The government, though, would rather see the whole burden of reducing our costs in international terms borne by working people. Little wonder that the share of national income accounted for by wages has fallen.

    Bryan Gould

    9 October 2012

    This article was published in the NZ Herald on 11 October.

  • The Same Tired Old Excuses

    As job losses reach crisis proportions, and many point the finger at an overvalued exchange rate, we have to put up with the same old tired and ill-informed assertions to the effect that overvaluation is not the culprit.

    Those who say this usually make two assertions; first, the exchange rate is irrelevant and secondly, there’s nothing we can do about it anyway. Neither assertion is remotely accurate.

    As to the first, the usual line is that factors other than price matter in international markets; yet only a moment’s thought will produce the commonsense conclusion that it would be very surprising if we could charge whatever we like. If we ask more for our products than the market says they are worth, we will have trouble selling them, or at least selling them at a profit. To argue otherwise is to deny simple reality.

    The one sure way of ensuring that we have to charge more than we should is to allow the exchange rate to rise too high. The exchange rate, after all, converts all our domestic costs of production – for labour, energy, raw materials and so on – into the prices we charge in international markets, and that includes our own, where we compete with imports. As the rate rises, it ensures that those prices are artificially inflated, and are no longer competitive. Even on those sales we do make, it cuts the profit margin – just ask the dairy farmers; the whole economy suffers as the cream is blown off the top of our dairy exports by the overvalued dollar.

    That is why, in a nutshell, we can’t pay our way in the world, and have to borrow excessively to cover the gap between what we can sell and what we want to buy. That is why we dare not grow our economy fast enough to bring down unemployment; it’s because we know that if we do, we’ll run into balance of payments constraints and will have to borrow even more.

    We’ve been doing this for so long that we think it is natural and unavoidable. That’s why ministers in successive governments over three decades have believed that solemn lectures about improving productivity, and promising that new research – always “soon” – will generate new “sunrise” industries, will do the trick. As any manufacturer will tell you, if the profit on your exports is decimated by the exchange rate, you have no money to re-invest in improving productivity, funding new research and technology, or taking any of the other steps needed to close the gap on better-resourced international rivals.

    The second argument is the fallback position always adopted by those who have run out of other arguments. All this may be true, they say, but there is nothing to be done about it. The dollar’s value is established by the market and reflects the fortunes of other currencies, like the US dollar. If that means a high New Zealand dollar, we just have to live with it.

    But this is nonsense. There is no such thing as a clean float. The view that the markets take of the Kiwi dollar is strongly influenced by what they know to be government policy, especially if that policy has a direct bearing on the dollar’s value and has been maintained for decades so that there is little prospect of it changing.

    What determines the value of the dollar, so that it is higher than it should be in terms of balancing our trade, is quite simple; it is the fact that we have for many years offered investors – especially overseas investors, the legendary Japanese housewife or Belgian dentist – an interest rate premium for buying New Zealand dollars. That premium has been so high for so long that short-term investors find it worthwhile to borrow money they don’t have at low interest rates in their own countries so that they can buy New Zealand securities at a high rate of return; and because so many do this, the demand for and therefore the price of the New Zealand dollar rises, and the investors make a capital gain into the bargain.

    The only people who lose from this are the people and businesses of New Zealand. Why does our government go on allowing this to happen? Because we insist on using high interest rates as our main, indeed only, counter-inflation tool; and since those high rates destroy our competiveness by pushing up the value of the dollar, we are then forced to borrow even more at even higher rates.

    Quite apart from other factors – like commodity prices and the terms of trade – that influence the value of the dollar, the main element of over-valuation is, in other words, a direct consequence of government policy. We could change that tomorrow if we wished. We need to understand that high interest rates and the overvalued dollar are not only damaging our economy but are not even appropriate as counter-inflationary tools. If we addressed the real reasons for inflation – excessive bank lending and credit creation for non-productive purposes – we could stop the insane process of deliberately pricing ourselves out of world markets.

    Bryan Gould

    12 September 2012

    This article was published in the NZ Herald on 14 September.